Oil Min fines RIL $1-bn; arbitration way out

New Delhi: After slapping a hefty penalty of over USD 1 billion on Reliance Industries for failing to meet gas output targets, the Oil Ministry said the company's five- month old arbitration notice on the issue was not valid and a fresh notice was required if it were to contest the fine.

Oil Ministry had on May 2 written to RIL disallowing USD 1.005 billion out of the USD 5.756 billion investment it had made on developing Dhirubhai-1 and 3 (D1&D3) gas fields in the Bay of Bengal deepsea block KG-DWN-98/3 (KG-D6) as current output of 27.52 million standard cubic meters per day was way short of the target of 80 mmscmd for this time of the year.

The fall in output, which the ministry blamed on RIL not drilling its committed quota of wells, had led to a large chunk of production facilities lying unused or under-utilised, a top ministry official said on Friday.

RIL had anticipated such a move and had on November 23 slapped an arbitration notice on the ministry saying the Production Sharing Contract (PSC) allows operators to recover all their investment and cost recovery was no way linked to level of production.

The ministry, based on an opinion of the Solicitor General Rohinton Nariman, had rejected the arbitration saying no dispute had arisen. RIL last month moved Supreme Court seeking appointment of arbitrators.

"At that time there was no dispute. And this is not just us but even SGI saying so. Now that we have initiated the process of restricting cost recovery, they have a right to resort to dispute resolution mechanism as set out in PSC," he said.

"But they (RIL) will have to issue a fresh arbitration notice. The previous one is not valid as that was issued based on apprehensions and on media reports of a possible action. If they want to contest our move, they will have to issue a fresh arbitration notice," another top official said.

The ministry's 7-page notice, signed by Giridhar Aramane, Joint Secretary (Exploration) in the Oil Ministry, that was faxed to RIL and its partner Niko Resources' Mumbai offices, stated that USD 457 million of cost would be disallowed in 2010-11 and USD 1.005 billion in 2011-12.

The official clarified that the USD 1.005 billion was cumulative cost recovery disallowed and should not be seen as additional penalty.

The cumulative cost disallowed is higher than USD 778 million that the ministry had been previously contemplating.

The drop in reservoir pressure coupled with increased water and sand ingress has seen output from D1&D3 fall from 53-54 mmscmd achieved in March 2010 to 27.5 mmscmd last month, instead of rising to projected 80 mmscmd for current year.